Up to two million tonnes | A drop in feed requirements has led to the cancellation of Brazilian shipments
Cancelled Chinese soybean shipments are dramatically changing market dynamics for the oilseed.
Dan Basse, president of AgResource Co., estimates that Chinese importers have walked away from 1.5 to two million tonnes of soybean shipments, most of which originated from South America.
A sharp drop in hog prices and the reappearance of avian flu has led to a 13 to 15 percent decline in feed consumption in China compared to a year ago, which has reduced crush margins.
That started a backup in the system, which was exacerbated by Chinese importers double booking for the February-March delivery period with soybeans from the United States and Brazil.
Crushers were worried about Brazil having the same logistical problems as last year, so they also booked U.S. soybeans to cover them.
However, Brazil produced a big crop that came off the fields early, and the government’s new vessel loading and trucking protocols have greatly reduced port congestion.
As a result, Brazilian soybeans have been arriving in China at the same time as the double-booked U.S. product.
“This has just given the Chinese a real case of indigestion,” said Basse.
Importers wanted to walk away from U.S. shipments, but they made the tactical mistake of booking those sales on a cost, insurance and freight (CIF) basis, which made it too costly to cancel.
So they have been canceling shipments from Brazil instead.
Importers typically lose a $3 to $3.5 million performance bond for defaulting on a Panamax vessel, but it’s less costly than bringing in expensive imported product for crushing in an over supplied market.
Other shipments are washed out and resold to another buyer without penalty.
Basse said ships used to not set sail without the price of the commodity fixed and a letter of credit in place, but that isn’t the case anymore because of increased competition in the soybean business.
“Exporters, because of their willingness to cut deals and do things in back rooms and everything else, have become rather lax in their contractual obligations,” he said.
Ships are leaving port without a fixed price or a letter of credit in place, and the terms surrounding the cargo may not be in place until a week before arriving at port.
“We’ve got some vessels that are sailing to China from Brazil and the United States that conceivably could be defaulted on in midstream,” he said.
A lot of the South American cargoes that China has cancelled are being rerouted to the United States, where soybean supplies are extremely tight.
The U.S. has imported an estimated 50 million bushels of soybeans from Brazil, Argentina, Canada and other exporters.
“We think in total that the U.S. will import a record 80 million bu. of beans this crop year to avert the supply tightness we once feared,” said Basse.
That estimate is well above the U.S. Department of Agriculture’s estimate of 65 million bu. The imported product is expected to put downward pressure on U.S. soybean prices.
“Some of the commercial crowd fears that this is only the start of a deeper correction that could last into summer,” said Basse.
AgResource believes Brazil’s soybean exports will be one to 1.5 million tonnes lower than what the USDA is forecasting, despite the U.S. taking some of the cancelled shipments.
Argentina’s exports will also be reduced.
It isn’t good news for Canadian and U.S. soybean farmers, who are going to have export competition from South America lasting into the September-November period, which is typically the big shipment period for North American product.
“(That) will diminish our demand for new crop going forward,” said Basse.